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The Daily Reckoning


The Fraud of the Great Moderation

Tuesday, June 24, 2008

    The Daily Reckoning PRESENTS: There are many repercussions when there is even a slight hiccup in the farming industry. That’s why, according to James Howard Kunstler, Iowa in 2008 will be an even slower-motion disaster than Hurricane Katrina in 2005. Read on...

by James Howard Kunstler

A catastrophe for Iowa farmers will not be just a catastrophe for Midwestern Americans. In the Iowa floods, we'll see more evidence of how the problems of weird weather (climate change) combine and ramify the problems associated with Peak Oil. In this particular case they lead to an inflection point sometime around the 2008 harvest season, which will also be our time of political harvest.

These are not your daddy’s or granddaddy’s floods. These are 500-year floods, events not seen before non-Indian people starting living out on that stretch of the North American prairie. The vast majority of homeowners in Eastern Iowa did not have flood insurance because the likelihood of being affected above the 500-year-line was so miniscule – their insurance agents actually advised them against getting it. The personal ruin out there will be comprehensive and profound, a wet version of the 1930s Dust Bowl, with families facing total loss and perhaps migrating elsewhere in the nation because they have no home to go back to.

Iowa in 2008 will be an even slower-motion disaster than Hurricane Katrina in 2005. Beyond the troubles of 25,000 people who have lost all their material possessions is a world whose grain reserves stand at record lows. The crop losses in Iowa will aggravate what is already a pretty dire situation. So far, the US Public has experienced the world grain situation mainly in higher supermarket prices. Cheap corn is behind the magic of the American processed food industry – all those pizza pockets and juicy-juice boxes that frantic Americans resort to because they have no time between two jobs and family-chauffeur duties to actually cook (note: reheating is not cooking).

Behind that magic is an agribusiness model of farming cranked up on the steroids of cheap oil and cheap natural-gas-based fertilizer. Both of these “inputs” have recently entered the realm of the non-cheap. Oil-and-gas-based farming had already reached a crisis stage before the flood of Iowa. Diesel fuel is a dollar-a-gallon higher than gasoline. Natural gas prices have doubled over the past year, sending fertilizer prices way up. American farmers are poorly positioned to reform their practices. All that cheap fossil fuel masks a tremendous decay of skill in husbandry. The farming of the decades ahead will be a lot more complicated than just buying x-amount of “inputs” (on credit) to be dumped on a sterile soil growth medium and spread around with giant diesel-powered machines.

Like a lot of other activities in American life these days, agribusiness is unreformable along its current lines. It will take a convulsion to change it, and in that convulsion it will be dragged kicking-and-screaming into a new reality. As that occurs, the U.S. public will have to contend with more than just higher taco chip prices. We’re heading into the Vale of Malthus – Thomas Robert Malthus, the British economist-philosopher who introduced the notion that eventually world population would overtake world food production capacity. Malthus has been scorned and ridiculed in recent decades, as fossil fuel-cranked farming allowed the global population to go vertical. Techno-triumphalist observers who should have known better attributed this to the “green revolution” of bio-engineering. Malthus is back now, along with his outriders: famine, pestilence, and war.

We’re headed, it seems, toward a fall “crunch time,” and that crunching sound will not be of cheez doodles and taco chips consumed on the sofas of America. I think we’re heading into a season of hoarding. As the presidential campaign moves into its final round, Americans may be hard-up for both food and gasoline. On the oil scene, the next event on the horizon is not just higher prices but shortages. Chances are, they will occur first in the Southeast states because oil exports from Mexico and Venezuela feeding the Gulf of Mexico refineries are down more than 30 percent over 2007.

Perhaps more ominous is the discontent on the trucking scene. Truckers are going broke in droves, unable to carry on their business while getting paid $2000 for loads that cost them $3000 to deliver. In Europe last week, enraged truckers paralyzed the food distribution networks of Spain and Portugal. The passivity of U.S. truckers so far has been a striking feature of the general zombification of American life. They might continue to just crawl off one-by-one and die. But it’s also possible that, at some point, they’ll mount a Night-of-the-Living-Dead offensive and take their vengeance out on “the system” that has brought them to ruin. America has only about a three-day supply of food in any of its supermarkets.

The yet-more-ominous thing here is that shortages of food and oil are two fiascos that are pretty clearly predictable for the second half of the year. That’s bad enough without figuring in the “unknowns” that could kick up American hardship a few more notches. The hurricane season just got underway – obscured for the moment by the bigger weather story in Iowa. The fate of the banks is a train wreck still waiting to happen. As it occurs – also heading into the high political and hurricane seasons – we could find ourselves not only a nation wet, hungry, and out-of-gas, but also completely broke. I’m sorry that Tim Russert will not be here to talk us through it all.


James Howard Kunstler
for The Daily Reckoning

And Concerning Water..

Agora Financial


The Rude Awakening: Hot Coffee in the face of Wall Street

Tuesday, June 24, 2008, 5:51 AM

The Oracle of Gin Flat
By Chris Mayer

About 7,050 feet above sea level, high in the snowy Sierra Nevada Mountains, lies a little frozen meadow called Gin Flat. It got its name from a speak-easy that closed long ago. Nestled amid a forest of pine and cedar, a little scientific outpost measures snowfall - and has done so since the 1930s.

This is important work, because the melting snow from the Sierra Nevada provides water for millions of Californians. The size of the snowpack at Gin Flat gives us clues to how much water will flow from the mountains. With the data gathered at Gin Flat, scientists can divine the future of California's water supply.

The latest reading this year is that the snowpack is only 67% of normal. So California looks like it will have more water troubles this year. "I have not seen a more serious water situation in my career," opined one official. "And I've been doing this 30 years." Some scientists think that we're overstating the water content at Gin Flat by 20% or more. If so, we have even less water than we think.

Across the globe, scientists look to the world's mountains and watch carefully… The snow is melting earlier this year. That means water will flow less freely this summer, when people need it most. The areas most at risk of lack of fresh water include parts of the Middle East, southern Africa, the United States, South America and the Mediterranean.

In this piece, we return to a familiar theme: the unfolding water crisis. The spur that drives me to revisit it once again is the thoughtful annual report of a publicly traded water company that has purchased water rights in the western United States. In the shareholder letter, the company's CEO wrote: "Arguably, the most critical issue facing the Western United States is the availability of water to support continued population growth."

Water scarcity in the West is not new, the CEO admits. At least since the time of Mark Twain, people have been fighting over it. ("Whiskey is for drinking and water is for fighting over," goes the old saying often attributed to Twain.) But what's new this time is the sheer amount of water needed to support the fastest and largest population growth in the union. In Arizona and Nevada (and Colorado and Idaho), population grows at a pace double the national average. Yet water is scarcest in these places.

For all that's demanded of it, water is too cheap. The CEO continues: "Market prices [for water] have started to appreciate dramatically in recognition of the actual economic cost of developing new supplies." Despite constant threats of shortages, there is a reluctance to allow the price of water to rise. Lastly, the company's CEO chides the public's irrational view of water as something that ought to be a "free… public resource, not subject to market forces."

"Paradoxically, this same public is willing to pay exceptionally high prices for bottled water," he writes, "rather than drink inexpensive tap water, in part due to the often mistaken belief that bottled water is safer to drink."This water scarcity issue does not only affect America's dry Western half. It's a global issue affecting many other parts of the globe. In a water-constrained world, conserving water becomes top priority. Treating existing water supplies when new supplies are not available becomes especially important.

On that idea, I've held Nalco Holding in my Mayer's Special Situations letter since summer 2006. It's up 46% for us, but I believe bigger gains lie ahead. Nalco is the world's largest water-treatment company. Nalco is all about helping companies treat and conserve water in their manufacturing processes.A trio of insiders bought the stock in February and March for prices at $19-22 per share. It's a steady business that generates plenty of cash flow and trades for 15 times next year's estimate of earnings. Nalco is one of the few water stocks sitting a good 20% or more off its high.

As an investment idea, the water theme is not going away anytime soon. Many trends in energy and agriculture make the water situation only worse. Take a recent Tampa, Fla., development. Officials got a shock when the state's first ethanol facility put in its request for water - 400,000 gallons per day! That instantly made it one of the top 10 consumers of water in Tampa, yet there are plans to double its capacity. All the while, Florida's rivers and lakes are at or near record lows.

It's madness, of course. But at least you can make it work for your portfolio by putting some money in the water resources arena. Maybe one day, people will quote the readings at Gin Flat - and its counterparts across the globe - as they do the Dow Jones industrial average.

    Folks, it's closing in on us. And still, most Americans think the fuel crisis will be normalized again—it always has before. This food thing, we are told by many, is a temporary thing. "Nothing to be concerned about."

    Times in America will change rather abruptly.
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